Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: Just when investors thought Dow 20,000 was out, the major indices pulled them back in. The market dipped below the major threshold earlier this week and has yet to retake that level. The dip was mainly attributed to the immigration ban protests, but these types of events don’t usually impact the markets. Is this any different?
Stovall: I think it’s a little bit different in that the market is responding to the flurry of executive orders, combined with tweets that really only seem to be increasing investor animosity and concern that some of these actions will end up being counterproductive. So I don’t think that investors are responding to the 20,000 threshold as much as they are the uncertainty associated with actions early on in this Trump administration. My big worry is that hype becomes snipe, which then turns into gripe, and as the weeks progress. So we’ll just have to see whether the enthusiasm associated with this Trump jump remains intact.
EQ: With all that’s going on, it seemed the Fed took a backseat in terms of the share of market attention. But the FOMC concluded its latest meeting Wednesday. What were your thoughts on the Fed statement and leaving rates unchanged?
Stovall: My thought is that the Fed statement did not give any additional clarity on what Wall Street is expecting. It did not give any kind of an indication that they will not be raising rates in March, which I think some investors still believe is the case. So it’s pretty much status quo, and nothing that is going to call investors to believe that the Fed is going to be more dovish. We certainly had very strong ADP employment numbers come out Wednesday, which could be offsetting the weaker-than-anticipated fourth quarter GDP reading. I think basically the Fed is staying pat, focusing on the data, and will be raising rates anywhere between two to three times in 2017.
EQ: In this week’s Sector Watch report, you discussed the Chinese Lunar New Year, and the historical price performance associated with the Chinese zodiac. Considering that we’re now in the year of the Rooster, what might investors expect this year if they subscribed to this belief?
Stovall: Well, the report was sort of tongue-in-cheek in that I find it interesting that so many investors gravitate toward indicators that have very high correlation but absolutely no causation associated with them. The most famous of them is the Super Bowl Theory, popularized by my father Robert Stovall. The second is numerology, which many investors reminded us of in 2015, noting that years ending in “5” had always been up. Well, that changed in 2015.
But for the Chinese Lunar New Year, we find the year of the Rooster since World War II has posted a pretty unimpressive return—or in other words, nothing to crow about. The average increase in price is 4% and the market has been up as many times as it’s been down. It should be noted, however, that years ending in “7” have historically only seen gains of 4% going back to WWII, and CFRA’s year-end target for the S&P 500—which is obviously based on more tried-and-true fundamental reasons—also points to a 4% gain based on earnings growth and inflationary expectations.
EQ: You mentioned the Super Bowl Theory, which has actually been right 80% of the time since 1967. According to this theory, which team should investors be rooting for come Sunday?
Stovall: The Super Bowl Theory says that if a National Football Conference (NFC) team wins—in this case, the Atlanta Falcons—the Super Bowl then the market will go up. If an American Football Conference (AFC) team—in this case, the New England Patriots—wins, the market will go down. Whenever the indicator has pointed to an up reading for the coming year, the Dow has risen 86% of the time. It has been less successful when it has pointed to a down year, however, it was right only 64% of the time as evidenced by the Denver Broncos of the AFC winning in 2016. That implied we should’ve been down for the year, but in fact, we were up 9.5%. So all together, both up and down predictions have been correct 80% of the time. So this time around in 2017, bulls should be routing for the Falcons because a victory on their part would imply an up year for the market.